some QBank questions seem wrong?

CFA Level II Equities
#1

Hi everybody,

I need your helps to make clear this matter:

I find several questions in the Browse LOS part (QBANK LEVEL 2/2012): SS12 R41 Los q : the questions relate to the comparison P/E of industry & market, all answers state that industry which has greater P/E indicates undervalue compared to market, it’s quite strange. is it a mistake?

Thank you in advance for all your helps

#2

I had similar confusion until I submitted question at their faculty mailbox. Essentially, whenever the justified < market, stock is overvalued. Qbank is right - just think about the same logic as we would use when we use div models, computed values compared to market prices.

Justified can also be industry benchmark. Market = based on market price.

In your statement, when industry PE (this is your justified) > market P/E for a specific stock , we say that justified price > current market price (hence the specific stock is undervalued).

#3

hi CMLSML,

I’m clarified now, it seemed i misunderstand the question

Thank you so much for your reply